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CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities

While auditing Trident Power Ltd., a generating company, CA Rohan notes that the company has recognised revenue from sale of electricity to a State distribution company, including units supplied but not yet metered at the year end. The tariff is regulated by the Electricity Regulatory Commission. Which audit procedure best addresses the risk of misstatement of this unbilled revenue?

The auditor should test the company's estimate of unbilled units by comparing it with subsequent meter readings and billing, and verify the tariff applied against the regulator's order. Unbilled revenue is an accounting estimate accrued as earned, not a contingent asset or a cash-basis item.

  1. AAccept the figure because tariff is regulated and hence no estimate is involved
  2. BExamine the basis of estimating unbilled units, check it against subsequent meter readings and billing, and verify the applicable tariff orderCorrect
  3. CRecognise unbilled revenue only when cash is received from the distribution company
  4. DIgnore unbilled revenue as it is a contingent asset

Explanation

Unbilled revenue is an accounting estimate. The auditor tests the estimation method, compares it with subsequent meter readings and invoices, and verifies the tariff against the regulator's order. Tariff regulation does not remove the estimation risk, and recognition on cash receipt is not the accrual basis.

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